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In the aftermath of the Great Recession, various mortgage modification programs were introduced to help homeowners struggling to make their monthly mortgage payments remain in their homes. We use mortgage data at the individual borrower level, joined to credit card spending and deposit account data, to investigate the relative importance of changes in monthly mortgage payments and long-term mortgage debt on default and consumption. We first quantify the variation in payment reduction offered by these modification programs and then use the variation in payment and principal reduction experienced by program recipients to estimate the impact of payment and principal reduction on default and consumption.

First, we find that payment reduction for borrowers with similar payment burdens varied by two to three times across different modification programs. Borrowers with a high mortgage payment to- income (PTI) ratio received more than twice the payment reduction from HAMP compared to the GSE program. Borrowers with a low mortgage PTI ratio received three times the payment reduction from the GSE program compared to HAMP. Second, a 10 percent mortgage payment reduction reduced default rates by 22 percent. Third, for borrowers who remained underwater, mortgage principal reduction had no effect on default. This suggests that “strategic default” was not the primary driver of default decisions for these underwater borrowers. Fourth, for borrowers who remained underwater, mortgage principal reduction had no effect on consumption. Finally, default was correlated with income loss, regardless of debt-to-income ratio or home equity. Mortgage default closely followed a substantial drop in income. This pattern held regardless of pre-modification mortgage PTI or loan-to-value ratio, suggesting that it was an income shock rather than a high payment burden or negative home equity that triggered default.

These findings suggest that mortgage modification programs that are designed to target substantial payment reduction will be most effective at reducing mortgage default rates. Modification programs designed to reach affordability targets based on debt-to-income measures without regard to payment reduction or target a specific LTV ratio while leaving borrowers underwater may be less effective at reducing defaults. Furthermore, policies that help borrowers establish and maintain a suitable cash buffer that can be used to offset an income shock could be an effective tool to prevent mortgage default. Both high and low mortgage PTI borrowers experienced a similar income drop just prior to default, suggesting that even among those borrowers with “unaffordable” mortgages, it was a drop in income rather than a high level of payment burden that triggered default.

Wednesday, August 09, 2017

The title of the piece, in The New Republic, is The Left’s Misguided Debate Over Kamala Harris. Perhaps non-Californians will be less interested in the parts about Kamala Harris and more interested in the parts about foreclosure victims (recall that Dayen wrote the excellent book Chain of Title about the foreclosure crisis). Here is an excerpt:

[I]f you were to rank the performance of law enforcement officials during this period, everyone would be tied for last. They all deserve criticism for their inability to hold the perpetrators of the biggest incidence of consumer fraud in American history to account. They all displayed shocking cowardice and let down millions of vulnerable people, when they had reams of documentary evidence revealing the crime, enough to extract much more justice and far better outcomes for the victimized. They all ushered in the two-tiered system of justice that sapped people’s faith in democracy * * *

* * *

Homeowner victims have spent the past decade largely invisible from public debate. The only time their plight gets highlighted is when somebody has an axe to grind against a particular public official. Only then do homeowners get trotted out for sympathy, as if the country didn’t ignore them for years. This is the problem with a politics of personality, which is consumed more with doling out praise and blame for high-profile politicians than demanding justice for broad social problems. It’s time the left put the issues back at the center of public debate.

Monday, February 27, 2017

In the wake of the recent election, the mind-boggling possibility of a return to the pre-crisis world of 2008 is now a real threat. That is precisely what would happen if Congress and the incoming Administration forget why the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted and what the Consumer Financial Protection Bureau (CFPB) has done in a few short years to restore sanity, market discipline, and fairness to consumer financial markets.

* * *

Despite criticism from some that Wall Street was saved while Main Street was ignored, consumers have benefited from elimination of the most abusive practices and compensation for at least some of their losses. The CFPB can be credited for many of these gains.

* * *

In case studies for our forthcoming book on the CFPB’s first five years, we were able to probe some of the factors that led to success compared with others that presented a challenge.

* * *

Against extraordinary odds, the CFPB mounted a coherent and productive financial consumer protection project that pulled us back from the precipice of global financial ruin But its early achievements will continue to be put to the test as the Bureau matures, the original impulse for reform drifts further away as the recent crisis becomes a more distant memory, and political challenges mount.

Tuesday, February 21, 2017

I asked [the] office [of Rep. John Ratcliffe, who has proposed to abolish the CFPB] to elaborate [on his claim that the CFPB hurts consumers]. I received a statement from Ratcliffe citing the group’s “qualified mortgage rule,” which he said “has made it harder for young people and retirees on fixed incomes to be able to purchase a home.”

He also cited “rules on prepaid cards and short-term lending products” — i.e., payday loans — and the agency’s “decision to expand class-action litigation in place of arbitration in consumer finance disputes.”

These are completely bogus complaints.

The qualified mortgage rule, also known as the ability-to-repay rule, requires that lenders do their homework to make sure a loan applicant can make regular payments. The idea is to avoid a repeat of the mortgage mess, in which banks handed money to pretty much anyone with a pulse and then passed off the crappy loans to unwary investors.

And the housing market is doing just fine, thanks. Mortgage applications for new homes were up 9.2% last month from a year before, according to the Mortgage Bankers Assn. Last year saw the largest number of existing homes sold — 5.45 million — since 2006, according to the National Assn. of Realtors.

* * * [The Bureau's] proposed rule for payday loans would require lenders to check if borrowers are creditworthy and make it harder for people to be trapped in endless cycles of debt.

The proposed rule for dispute settlement would block financial firms from using mandatory arbitration as a way to avoid class-action lawsuits. * * *

A 2007 study by Public Citizen found that over a four-year period, arbitrators ruled in favor of banks and credit card companies 94% of the time in disputes with California consumers. A 2015 Consumer Financial Protection Bureau study concluded that “class actions provide a more effective means for consumers to challenge problematic practices by these companies.”

Monday, January 30, 2017

"OneWest Bank did not 'robo-sign' documents," Mnuchin wrote in response to questions from individual senators, "and as the only bank to successfully complete the Independent Foreclosure Review required by federal banking regulators to investigate allegations of 'robo-signing,' I am proud of our institution's extremely low error rate."

But a Dispatch analysis of nearly four dozen foreclosure cases filed by OneWest in Franklin County in 2010 alone shows that the company frequently used robo-signers. The vast majority of the Columbus-area cases were signed by 11 different people in Travis County, Texas. Those employees called themselves vice presidents, assistant vice presidents, managers and assistant secretaries. In three local cases, a judge dismissed OneWest foreclosure proceedings specifically based on inaccurate robo-signings.

* * *

Carla Duncan, a social worker from Cleveland Heights, was snared by OneWest's robo-signing machinery.

On her way out of town for a short trip in 2010, Duncan stopped by her home to get her mail and found a note from a field inspector for her mortgage company saying that her house was vacant and was going to be boarded up.

"It wasn't vacant. I was living there," Duncan said.

* * * "

What Duncan didn't know at the time was that OneWest had begun foreclosure proceedings on her three-bedroom home even though she was up-to-date on her payments. * * *

After hiring former Ohio Attorney General Marc Dann, waging a five-year court battle and filing personal bankruptcy, Duncan was finally able to get the foreclosures dismissed and keep her home and rental property. She said the experience was devastating.

"It's almost like being raped, like being emotionally violated," Duncan said. "It got to the point that I was afraid to open my own door."

Court records show that Duncan's mortgage was robo-signed by Erica Johnson-Seck, vice president of OneWest's department of bankruptcy and foreclosures. From her office in Austin, Texas, Johnson-Seck robo-signed an average of 750 foreclosure documents a week, according to a sworn deposition she gave in a Florida case in July 2009.

Under oath, Johnson-Seck acknowledged that she did not read the documents she was signing, taking only about 30 seconds to sign her name. * * *

[Dayan reports on] a 2011 consent order issued by the federal Office of Thrift Supervision, which definitively stated that OneWest filed affidavits in state and federal courts “in which the affiant represented that the assertions in the affidavit were made based on personal knowledge or based on a review by the affiant of the relevant books and records, when, in many cases, they were not.”

* * *

* * * OneWest signed and agreed to the consent order, though it never admitted or denied the activity

However, in a Florida foreclosure case, a OneWest employee plainly admitted to robo-signing. On July 9, 2009 – four months after OneWest took over operations from IndyMac, with Mnuchin as CEO – Erica Johnson-Seck, a vice president with OneWest, gave a deposition in which she admitted to being one of eight employees who signed approximately 750 foreclosure-related documents per week.

“How long do you spend executing each document?” Johnson-Seck was asked. “I have changed my signature considerably,” Johnson-Seck replied. “It’s just an E now. So not more than 30 seconds.”

Johnson-Seck also admitted to not reading the affidavits before signing them, not knowing who inputted the information on the documents, and not being aware of how the records were generated. * * *

UPDATE: Ted Frank has pointed out to me a Forbes article describing how Judge Shack has been reversed in two cases for abusing his discretion for relying on newspaper articles and the web on the matter of robo-signing. The article links to the cases in question.

Saturday, July 16, 2016

I have now finished the audio version of David Dayen's book, Chain of Title. With two caveats, I think it's an excellent book. The caveats: first, I don't know enough about the events it describes to know how accurate it is, and second, I lose some comprehension with audiobooks, as opposed to reading the text. Nevertheless, it would be an excellent book for folks interested in consumer law to read. It reads like a novel about consumer protection, but unfortunately, it's not fiction. I am tempted to assign it as background reading the next time I teach consumer law, in part to make up for the fact that we don't devote class time to foreclosure fraud and robo-signing (I wish we could cover everything!), and in part to teach something about where consumer protection fits in today's landscape. Unfortunately, where consumer protection fits in the landscape is largely out of sight.

(Spoiler alert) The book is ultimately upsetting on several levels. First, consumers were treated badly. Many lost their homes to banks that couldn't prove that they were entitled to foreclose, and sometimes the bank clearly did not have a right to foreclose, as with people who were current on their mortgage payments or didn't even have a mortgage and were still foreclosed upon. Second, rather than regulators or consumer lawyers, according to the book, it was ordinary people who got the ball rolling, though regulators and consumer lawyers later played key roles. Third, while banks ultimately paid significant amounts in the national settlement, the author makes a strong case that the remedy wasn't nearly enough. Fourth, regulators and pro-industry government officials appear to have done more to protect banks than consumers. Florida Attorney General Bondi comes off as particularly terrible, but the Obama administration also failed to cover itself with glory. The book makes a strong argument that the law, including consumer protections, failed consumers.

Update: a consumer advocate who knows more about the AG settlement than I do says that while the settlement wasn't perfect, it also had a lot to recommend it, and that the AGs may well have gotten as good a deal as possible.

Sunday, July 10, 2016

As I listen to more of the Chain of Title audiobook, I am struck by how the acts of the robo-signers resemble those of consumers faced with disclosures. Like the consumers, the robo-signers signed the documents without reading them, trusting that the documents presented for their signature were what they should be. And maybe that shouldn't be surprising, because many of the robo-signers, despite having the title of bank vice presidents, were just ordinary people. One such robo-signer, who was identified as a vice president for five different banks (depending on which bank he was signing on behalf of), was paid only $10 an hour. Perhaps this is too much of a stretch, but I wonder if contemporary society's culture of not reading disclosures contributed to this phenomenon. But unlike many consumers, the robo-signers were committing fraud. The robo-signer who was paid $10 an hour wasn't signing his name, but someone else's. And often the documents they signed were affidavits stating that the affiant had personal knowledge of the events described in the affidavit. One passage that brings this home lists the prices from a catalog for re-creating documents, including affidavits. This might sound only like a technicality, until you realize that these documents were used to foreclose upon people and kick them out of their homes. And sometimes banks did that to people who had not defaulted on their payments or had not even taken out a mortgage.

In my previous post on the book, I mentioned a few consumer law professors whose names have turned up in the volume; since then, the book has referred to Adam Levitin. And consumer lawyers also make an appearance, including April Charney and Max Gardner, both of whom come across as heroic.

Tuesday, July 05, 2016

I'm listening to the audio version of David Dayan's book Chain of Title: How Three Ordinary Americans Uncovered Wall Street's Great Foreclosure Fraud. A lot of it will be familiar to those who followed media reports of the foreclosure crisis and robo-signing, but having it all pulled together gives it considerable impact, and those who didn't follow the reports and believe in the rule of law will find it particularly alarming. I will probably have more to say about it when I am further along in it. But for the moment, I thought this was an interesting and disturbing quote:

Servicers turned HAMP into a predatory lending program, squeezing borrowers for every payment they could get and then foreclosing anyway. After keeping people in trial modifications for a year, servicers would suddenly reject permanent relief and demand the difference between the trial and original payment, under threat of eviction. Bank of American employees later testified they were given Target and Best Buy gift cards as bonuses for lying to homeowners, denying HAMP modifications, and pushing people into foreclosure.

Incidentally, so far in my listening, the work of three consumer law professors has been mentioned: Katie Porter, Chris Peterson, and Alan White. It's nice to see members of the consumer law professor community acknowledged.

Wednesday, May 27, 2015

One of the most important but under-appreciated features of the Dodd-Frank Act was its establishment of the Financial Stability Oversight Council—a new entity with a clear statutory mandate to identify and respond to systemic risks to the entire U.S. economy. The authority was inspired by the failures of entities like the insurance giant AIG, which had to be rescued by taxpayers to prevent catastrophic effects on the U.S. (and world) economy.

But when FSOC designated MetLife as a systemic risk (in common parlance, "too big to fail"), MetLife fired back with a lawsuit challenging FSOC’s authority, among other things, to designate a nonbank insurance company in this manner. MetLife is represented by Gene Scalia—a Washington lawyer who's made a cottage industry of challenging financial-reform regulation. Earlier this month, FSOC moved to dismiss the case (or in the alternative, for summary judgment). On the eve of the Memorial Day holiday weekend, several groups of distinguished scholars filed amicus briefs in support of FSOC.

Our firm serves as counsel to a group of prominent insurance-regulation scholars, led by Daniel Schwarcz of the University of Minnesota Law School, who filed a brief arguing that the patchwork of state-insurance regulations—on which MetLife urges the court to rely—is insufficient to regulate the systemic risk posed by massive financial conglomerates such as MetLife.

A distinguished group of scholars of financial regulation and administrative law, led by Robert Jackson and Gillian Metzger of Columbia and Kate Andrias and Michael Barr of the University of Michigan, filed a brief arguing that Congress had intended to give FSOC broad powers to regulate nonbank financial firms, subject only to limited judicial review.

Viral Acharya and a group of other distinguished NYU economists filed a brief arguing that, as a matter of economic reality (drawing on the group's considerable research in this area), insurance companies such as MetLife can pose systemic risk to the entire economy.

Finally, Better Markets, a non-profit organization focusing on financial regulation, submitted a brief arguing that Congress gave FSOC wide latitude to designate risky financial firms and that Congress chose not to require a “cost-benefit analysis” before any designation.

The case is now before U.S. District Judge Rosemary Collyer, who's expected to hold argument on the motion to dismiss. But it's unlikely that the district court will have the last word; the case has clearly been set up as a test case of Dodd-Frank's systemic-risk authority over nonbanks. No matter what happens, it's safe to say that the case is headed upstairs.